Pound set to remain volatile

The pound had been boosted last week by some surprisingly strong economic data. The

latest inflation report and retail sales numbers both came out above the analysts’

consensus. This news helped to lift the GBPUSD almost to 1.33 as the GBP versus the EUR

followed suit, rising to as high as 1.1307.

However, once again it was politics which got in the way of any further gains after the UK

PM faced a wall of intransigence in Salzburg last week. Her confirmation of this on Friday

morning is what sent the pound scurrying backwards into the weekly close.

The price has steadied somewhat yesterday, but has still not recovered much of that lost

ground and unlikely to do so either unless something significantly positive emerges in the

very near future.

A good demonstration of how that move lower in the pound played out against the EUR,

please take a look at a 3week chart updated as of earlier this morning.

GBP/EUR September 2018

From a purely the technical perspective, the rebound in the GBPUSD from 1.2662, to 1.3298

reached last Thursday, might just have done enough in terms of satisfying a ‘technical’

correction of what had been a pretty sizeable sell-off- from above 1.43 over the past few


So, of course what everyone wants to know is where to next then? Well, it is really all about

the politics in determining that. Quite simply, if one takes the view that we will eventually

get a deal, the pound at current levels is surely under-priced by any matrix. Conversely if

one takes the view that there will be no deal, then even at the current levels, the pound

could have much further to fall.

My view on this is quite simple and whilst I stand to be corrected of course; I never thought

there was much of a deal to be had in the first place. Perhaps I’ll share the reasons for that

with you another time, but essentially for over two years now Brussels has talked loud, but

actually offered very little. That was certainly the message again last Friday.

As it stands, leaving the Irish border issue aside, it would appear that we have two choices.

Without making the obvious quip on that; it looks like a Canada or Norway style deal is all

that’s on the table right now. The Norway arrangement looks unacceptable this side of the

channel, so that leaves the Canada model as the only likely way forward.

Now, if that plays out, then it would avert the almighty ‘crash out’ that looks likely

otherwise. A crash out that would surely lead most people to look back at even the current

sterling price with envy.

In the meantime, until that outcome is known, the pound is going to remain volatile and

hostage (as it has been) to every soundbite that hits the newswires or the Twittersphere!

What this will also mean, in the absence of certainty; is that every significant rebound (like

the one seen last week) will be met with sellers. Not just speculative ones either, but those

keen to continue to hedge themselves against the worst case scenario.

In the very short term though the pound is continuing to hold above a key level at 1.3054,

helped largely by some positive M+A flow (Comcast/Sky deal) which helped a slight rebound

take place yesterday versus the USD and the EUR.

Finally, turning briefly to over the pond this morning, the US Federal Reserve is almost

certain to raise rates again tomorrow evening which is of course thoroughly expected by the

markets. Perhaps, the more interesting thing will be; what the US central bank has to add

(or detract) on the prospect of a further rate increase this year and any subsequent dollar

reaction following that.

Key data events this week:

26/9- 7pm US FOMC monetary policy decision

26/9 - 10pm Reserve Bank of New Zealand monetary policy decision

27/9- 1.30pm Final reading of US Q2 GDP

28/9- 9.30am Final reading of UK Q2 GDP

28/9- 10.00am Eurozone September CPI report

28/9- 1.30pm Canadian July GDP report